Strong start to the year driven by stockpiling in the Americas and Europe. Weak AOA with sales in China down by a double- digit percentage, which we believe sets the tone for the next quarter. These results follow the previously expected trend and we see no major change to our estimates. Nestlé continues to be in our top-pick list in the current environment.
FY19 and Q4 slightly missed expectations, while reaching the mid-term guidance for sales was finally postponed by 1-2 years. This, however, doesn’t stop us from continuing to believe that the food giant is still very robust, delivering lasting progress, while this should continue thanks to its successful transformation projects.
Nestle reported 9m results in line with the consensus estimates. Growth was strongly supported by the significant performance in the USA and Purina Petcare globally. Good cash inflows, from cash development and disposals, strongly contributed to the group’s decision to distribute up to CHF20bn in buy-backs over 2020-22. Nothing stops Nestlé anymore.
A pretty good set of results, with volumes and margins ahead of expectations. Further recovery in the US is the good news, while Asia and Europe were weaker. We believe the group is on track to beat its target.
Nestle reported Q1 19 results, beating analysts’ expectations. The growth momentum in the US, China and Brazil have pushed up the figures, while Purina pet care, dairy and infant nutrition have driven the growth. We are still confident in the stock. No major change in our target price is expected as we have already pushed up our numbers following the FY18 results and these seem in line with perspectives.
The FY18 results were in line with the analyst consensus, and showed a reinforcement in its two core markets: the US and China. We see the reshaping of the portfolio as very encouraging and we are confident that the company will reach its 2020 targets.
The numbers are broadly in line with the consensus. We see the company as being on track to achieve its FY guidance. The departure of Wan Ling Martello is a big loss for the company, in our opinion, and puts a shadow over the future performance of the AOA zone.
Good Q2 driven by improvments in the US and China. Infant Nutrition also saw some sequential improvment. Our Add recommendation is maintained.
Nestle will pay Starbucks $7.15bn to have perpetual rights to market Starbucks’ products around the world outside Starbucks’ coffee shops. The business has annual sales of $2bn. The agreement is subject to customary regulatory approvals and is expected to close by the end of 2018. About 500 Starbucks employees will join Nestle. This transaction will not affect Nestlé’s share buy-back programme.
Encouraging quarter after a disastrous Q4, although the company still has a long way to get back on track. As positives, we note the US has returned to growth, with also improvements in Pet care and Nestlé Skin Health. The softer pricing environment seems to be the new reality for packaged food companies.
We see no major changes to our target price.
A very weak quarter, below market expectations. The company cited the challenging environment in North America (soft consumer demand in the US) and Brazil (negative pricing due to milk price decreases).
We see management actively adressing the problems with initiatives to kick-in in FY18. We judge the FY18 guidance as already factored in by the market.
Nestlé announced that it has agreed to acquire privately-held Atrium Innovations, a global leader in nutritional health products, from a group of investors led by Permira Funds for $2.3bn in cash. Atrium’s FY17 sales are expected to reach almost $700m.
9M update: Sales grew organically +2.6% (cons. +2.5%, Q3: +3.2%) with real internal growth (RIG) up +1.8% and pricing +0.8%. On reported figures, sales were down 0.4% (FX: -0.4%, net acquisitions: -2.6%).
OG by division: the Americas +1.3% (cons. +2%), EMENA +1.9% (cons. +1.3%), AOA 5.3% (cons. +4.8%), Waters +2.2% (cons. +4%), Nestle Nutrition +1.0% (cons. +1.2%), Other Businesses +5.1% (cons. +3.4%).
Developed markets increased +0.8% organically, whereas emerging markets posted 5.1% OG.
The group expects organic growth for the FY to be in line with 9M. The underlying trading operating profit margin is expected to improve +20bp, whereas the trading operating margin (including restructuring costs) should be down 40-60bp at constant FX. EPS at constant FX is expected to increase.
At the investors seminar, Nestlé outlined its roadmap for the 2020 horizon. The main points are as follows:
• An organic top-line growth target of mid single-digit by 2020.
• An underlying trading operating margin target of 17.5% to 18.5% by 2020 vs. 16% in FY16 (the underlying trading operating margin excludes costs of restructuring).
• Around CHF2.5bn estimated restructuring costs from 2016 to 2020 (CHF0.2bn incurred in FY16, CHF0.5bn is expected to be delivered in FY17) aiming mostly at manufacturing (CHF0.6-0.8bn), procurement (CHF0.5-0.6bn) and general & administrative costs(CHF0.9-1.1bn)
• Share buy-backs are expected to be evenly spaced over three years (as a reminder the group made a CHF20bn envelope available to M&A and share buy-backs).
• 10% of the portfolio is expected to be rotated (disposed of or invested).
A debate about why major US food manufacturers’ margins appear consistently higher than those achieved in Europe is, in our view, worth having. In particular, should greater willingness to outsource production processes and focus more on marketing, new product development, finance and strategic M&A be the answer, there could be significant revenue growth opportunities for those who act as food industry solution providers.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Distil delivered a solid trading performance in FY20, despite uncertainties caused by the impact of external events in the form of Brexit initially and COVID-19 more recently. With its disciplined cost approach, Distil saw a 15% increase in operating profit from a 2% rise in revenue. Range extensions have underpinned the continuing success of its leading RedLeg Spiced Rum brand and Distil has continued to lay the groundwork for the further development and future expansion of its brand portfolio.
Continuing its exceptionally strong year, Venture Life has announced it expects to ‘comfortably exceed market expectations' for FY20E. This outperformance stems from all areas of the business, supported by an enlarged order book, €168m multi-year Chinese agreement (+€7m in 2020) and demand for its new branded hand sanitising gel. Venture Life has announced an extension to its Alliance Pharma manufacturing agreement. On top of our March upgrade, we are today, significantly increasing our revenue and EBITDA forecasts for FY20E (+19% and +24%, respectively). We reiterate our Buy recommendation.
Companies: Venture Life Group
We are introducing our Best Ideas for 2019 and also review the performance of last year’s picks. We suggest ten solidly financed stocks with good business dynamics that ought to be considered for core portfolio holdings and six UK domestically focused stocks that our analysts believe should perform strongly in the event that uncertainties unwind. We also introduce a new style of research from N+1 Singer which presents a Company’s dynamics and metrics in a clear and concise manner and concentrates on the pivotal issues affecting that Company and an investment decision.
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Premier Foods’ FY20 results demonstrate the substantial progress the company has made over the past few years. The UK business has now grown for 11 consecutive quarters and Q121 is set to be very strong. In the UK the brands grew ahead of their categories and the innovation rate has hit a new high. A new landmark pensions agreement was signed in April, which could potentially significantly reduce the future funding requirements for Premier Foods. The recent triennial actuarial valuation delivers further credence to the pensions deal.
Companies: Premier Foods
Warren Buffett once said that as an investor, it is wise to be ‘fearful when others are greedy and greedy when others are fearful’. Fear is not in short supply right now.
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Nichols full year results show another year of good top-line execution and PBT delivery in line with market expectations. We make no meaningful forecast changes. The company enters 2020 with good self-help momentum and various NPD initiatives. There is no new news around the Middle East excise duty headwind. More clarity will emerge by the July interims. The recent FY20 profit reset should be seen in the context of an otherwise exemplary record on execution and delivery. A combination of high brand equity, significant top-line potential, geographical diversification, track record of innovation and a cash generative profile with balance sheet optionality warrants a premium rating.
Nichols has issued a Covid-19 update this morning, signalling the need to protect the balance sheet during the current uncertainty to help ensure it emerges in a strong position to deliver mid-term growth objectives. Briefly, whilst trading in the first two months of FY20 was in line with management’s expectations, Covid-19 is expected to have an adverse impact in the months ahead. This reflects both the OOH division being directly exposed to the UK lockdown of pubs/restaurants/cinemas but also recognising the potential risk to retail sales from any protracted restriction of movement of people worldwide. Given this backdrop, management now expect a significant financial impact in FY20. In line with some of its peers, the company is temporarily removing financial guidance and we withdraw our forecasts. Given the uncertain outlook, the Board has taken the prudent decision to cancel the final dividend announced in the Feb finals of 28p per share, conserving a significant £10.4m of cash. Notably, the update signals that the Board will consider reinstating the dividend payment once there is a better handle on the cash position post the critical spring/summer period. In addition to this there are various other cost action plans to protect the P&L and cashflow. Whilst today’s update is not a huge surprise given the Covid-19 backdrop, it does not fundamentally change the positive investment thesis - as evidenced by 10% PBT CAGR in the last decade (virtually all organic). Nichols has an asset light business model, an excellent and proven management team and a robust balance sheet (£41m netcash at Dec’19) to ensure it effectively manages near term pressures and prospers over the medium term.
Venture Life Group has announced the signing of a new, exclusive 15-year agreement with its Chinese partner on key products, including Dentyl. Significantly, the minimum purchase obligations over the 15-year period amount to €168m. This equates to, on average, £10m of revenues and potentially £4m of EBITDA, per year, to 2034, which we estimate has a present value of ~£21m or 25p per share. Further, we believe the agreement significantly improves the Group's long-term financial position. The deal clearly validates Venture Life's Chinese strategy and its partner's commitment to the long-term development of these key products. We reiterate our Buy recommendation.
Premier Foods’ H119 results demonstrate the business has become more resilient under the stewardship of outgoing CEO, Gavin Darby. Revenue growth of 1.0% in Q2 despite the hot summer was encouraging, and the UK relaunch of the Mr Kipling brand has clearly gone well. The news that Ambrosia may be sold suggests yet another step in the business transformation, although the price will determine the level of dilution and any change to net debt/EBITDA.
A brief year-end trading update with not a huge amount of details. The main point is that post the July 2019 profit warning, the PBT performance through a combination of mix and cost savings has come in towards top-end of market expectations, implying c18% y/y decline. So a c3% beat vs our £36.5m. Revenue decline at -9% however was worse than our -7%. This reflects ongoing challenges with the Rubicon and Rockstar barns and lower Irn-Bru volume due to price realignment. Net, the company had a better H2 than H1 and from our understanding, exits Q4 with good momentum. Looking ahead to 2020, the comps are easier and the company is expected to get back into growth mode (albeit 3% at the PBT level). The main cloud on the horizon is the Deposit Return Scheme for Scotland, and we understand the Scottish Parliament will provide an update on plans in the next few weeks. We view this as short-term negative for AG Barr and hence have a y/y profit decline for FY22. Post today’s update we nudge our current year PBT up by 2% and FY21 by 2% also. There will be some investor relief this morning but given the anaemic growth outlook and ongoing headwinds we feel an FY21 P/E looks full. We stay at Hold.
Companies: A.G. Barr
Cranswick’s FY20 results demonstrate its strength and agility and current trading confirms the company is well positioned despite the uncertainty posed by the COVID-19 pandemic and Brexit. Revenues were up 13.0% on a like-for-like basis, mainly driven by better price/mix, but with underlying volumes up 3.4%. Adjusted PBT was up 11.2% on the prior year and EPS up 8.4%. Net debt was £146.9m at year end, including IFRS 16 liabilities of £65.9m. The start to FY21 has been positive and hence the outlook remains unchanged.
Salmon prices held up much better than feared during Q2/20, and although Norwegian prices came in NOK 4/kg above our previous assumptions, US prices disappointed. Mowi is set to release its trading update around 15 July, and we now expect an operational EBIT of EUR 80m (83) vs consensus at EUR 75m. Seasonality adds short-term risk, and we stick to our Hold rating as well as our NOK 185 target price in this preview.
Companies: Mowi ASA